The Changing Landscape for Coal

Changes in the global supply and demand for energy have effected changes in the physical coal market. Global demand has increased in recent years, primarily driven by emerging economies like China, which saw a demand for fuel for power generation spike sharply in recent years.

This has meant a change in trade flow with more South African coal being delivered east into India and China opening up additional opportunities for the United States to export coal. CME Group, through NYMEX, has been offering coal products since 2001 when we launched the Central Appalachian Coal Futures contract. We’ve attracted significant volumes over the last year in our international contracts, the most liquid being the API2.

As the coal market has become more international and markets more interconnected, we’ve launched several other products, including API 8, which covers contracts for coal delivered into China. Though China’s economy saw signs of slowing down in 2012, the demand for power still appears to be on an upswing, growing 8 percent in November 2012 according to a report by Deutsche Bank.

China is also producing more rail capacity for coal. Despite these factors, some analysts believe imports in the country are headed for a slowdown as China – the largest coal producer in the world – relies on domestic production. This kind of uncertainty in the market has created a need for participants in the supply chain to manage their coal risk. This can be done with our API 8 contract. Increasingly, the risk is managed through these and other coal contracts that can be cleared through CME NYMEX . Our volumes in these products were over 173 million metric tons in Q4 2012 compared to 3.5 million a year earlier.

Certainly a general shift toward clearing can account for some of this growth. But most of it can be attributed to other key features that are offered from CME like straight-through-processing capability from broker screens, margin offsets and competitive fees. These, more so than macroeconomic factors, seem to be responsible for the growth since other coal markets did not see similar growth. Intercontinental Exchange coal futures were down 20 percent in December year over year.

As Bloomberg wrote in a story about the shift recently, we’ve worked closely with brokers and offered straight through processing, which makes trading more efficient. This allows trades executed on brokers platforms like Trayport to be submitted directly and immediately to CME ClearPort for clearing.

As with all markets, the recent regulatory environment means that more business is being cleared in general, and we’ve been able to bring a truly international offering for coal. With coal markets as interconnected as ever and infrastructure expanding as demand increases in key areas, 2013 promises to be another busy year for those looking to hedge their exposure to fluctuating coal prices.

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About OpenMarkets

About OpenMarkets

OPENMARKETS online magazine, produced by CME Group, is designed to keep you up-to-date on developments that can enhance your successful participation in the dynamic derivatives industry. The magazine features customer case histories, new product information, technology updates, trend stories, and timely online-only news briefs.

About CME Group

About CME Group

As the world’s leading and most diverse derivatives marketplace, CME Group is where the world comes to manage risk. CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate. CME Group brings buyers and sellers together through the CME Globex electronic trading platform and trading facilities in New York and Chicago. CME Group also operates CME Clearing, one of the largest central counterparty clearing services in the world, which provides clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort.